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Property Investment for Expats in Australia

Submitted: August 2013

Foreign investment in Australia is strongly welcomed by the Australian Government. Yet it is regulated.
Foreign individuals and companies must obtain prior approval from the Foreign Investment Review Board (FIRB) to buy, or otherwise acquire an interest in, real estate in Australia. If you are a temporary resident, you can normally buy an existing home only if you intend to use it as your principal residence. Moreover, you are expected to sell your property upon departure from Australia.

Despite this, only a select few foreigners see their application for investment in residential property rejected. Applications can be made online, and it normally takes 30 days for them to be processed. To check the likely outcome in your individual case, you should read the FAQ.

Property rights in Australia are strongly protected. Round-trip property transaction costs in Australia are comparatively low (around 6%), and property investment may be made through companies.

Australian housing market generally

Australia has experienced an unprecedented house price boom since the mid-1990s. Although real home prices are still close to their 2008 levels, Australian real estate is still very expensive, not to say unaffordable. Expect a 2-bedroom flat in a major city to cost beyond the AUD300,000 mark. Prices can be much more affordable in the countryside.

Developments on the property market carry a large political dimension, as there are winners and losers. Additionally, the winners of yesterday can become the losers of tomorrow, and vice versa. Australians are not unanimous as to whether there is a house price bubble, and you are likely to meet many contradictory statements. So far, there are no signs of a full-scale house price crash despite the many warnings.

The Australian housing market is very dependent on central bank interest rate variations. Watch out for any rate hike. As rates are going down at the moment, prices may go further up for some time. See Foreign Exchange for Expats in Australia.

An assessment of the Australian housing market must include many additional macroeconomic factors, including:

  • Mortgage availability
  • Developments in connection with the chronic housing shortage
  • Demographic trends
  • Evolution of foreign ownership restrictions
  • Tax policy, and
  • Psychological factors

Mortgaging

Get your documentation right before applying for a mortgage, and do it early to avoid disappointment.

It might be tricky for expatriates to take out an Australian mortgage, as lenders require documentation which isn’t necessarily available for non permanent resident individuals. The task gets even harder if you are a non-resident and you wish to buy Australian property.

However, some lenders appreciate that there is high demand from individuals who have an overseas element in their application. Therefore, the first thing to do is to look for a lender who is willing to offer its services to you.

Typically, you can expect an interest rate of between 5 to 6% if you are on a variable rate mortgage, and a loan to value ratio (LVR) of 80 to 95%. In addition, your lender will require that you have home insurance. See Insurance for Expats in Australia.

For an overview of the Australian mortgage market, you may use a price comparison website. Remember that:

  • your net borrowing costs include not only interest but also many additional fees and taxes
  • interest rates may go up in the future, as they are at historically low levels by Australian standards.

If you are already considering applying for an Australian mortgage, you might wish to use a specialist mortgage broker for expats. In any event, you should check how reliable your mortgage broker is.

Property taxes

There is a land tax in Australia. It is levied on property owners, and the rates vary from one state to another. No land tax is payable in respect of:

  • Your principal residence, and
  • Agricultural land (primary production land).

Additionally, municipal rates are due by property owners to fund certain local services such as waste disposal.

Higher land taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much land tax and municipal rates you can expect to pay.

Letting your property

On average, you can expect a gross rental yield of 4.5 to 6% with rents possibly going up.

If you decide to let your property, you must be aware of the applicable landlord and tenant law. Do not attempt to evict your tenant illegally.

The rules vary from one state to another. For an overview of landlord and tenant responsibilities in Australia, click here.

Australian Real Estate Investment Trusts (A-REITs)

Property investment can also be made through common investment vehicles. This may help you secure a yield without having to manage your property investments for yourself. Furthermore, this is a cheap way to achieve risk diversification.

A-REITs are designed to pay dividends each year. Distributions and capital gains are taxable in the hands of the investors. See Investment for Expats in Australia.

Do check the geographical exposure of your A-REIT. An diversified property portfolio may mitigate country-specific risks.

Taxation (basics)

In addition to land value taxes, you must pay tax on your capital gains and your rental income, if applicable. Rental income is subject to the standard progressive rates of income tax. See Investment for Expats in Australia.

Capital gains arising from the sale of your main residence are tax-exempt, and capital gains on the sale of assets held for at least one year are 50% taxable. Mortgage interest is not deductible.

Negative gearing

Gearing is the notion of financing your investment through debt. Typically, an investment is worthwhile only if you reasonably expect your future cash flows to exceed your interest expenses. If your future cash flows are below your interest expenses, your investment may still be worth it if you expect your future cash flows to eventually rise and surpass your interest expenses. In this latter case, your investment is a “growth” investment, and the notion of paying more debt interest than you receive in cash flows is called “negative gearing”.

The Australian tax system allows negative gearing expenses to offset your personal income if you rent out your property. Consequently, negative gearing is a strong tax incentive to support demand for investment in residential property.

Don’t forget that property investment carries two types of cash flows:

  • Rental income, and
  • Capital gains (a capital loss is a negative cash flow).

Negative gearing has been a key component of the Australian house price boom. Nevertheless, negative gearing may turn into a complete financial disaster if the housing market fails to keep pace.

Don’t be blurred by the potential tax benefits, and do not hesitate to seek professional and impartial advice regarding this matter.

 

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